Chapter_23_For_Class - 1 Chapter 23 Cost Behavior Analysis...

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Unformatted text preview: 1 Chapter 23 Cost Behavior Analysis 2 Cost Behavior and the Management Cycle Objective 1 Define cost behavior and explain how managers use this concept in the management cycle 3 Cost Behavior and the Management Cycle Cost behavior The way costs respond to changes in volume or activity Is a factor in almost every decision managers make Used to analyze alternative courses of action Select the course that will Generate income for owners Maintain liquidity for creditors 4 Planning Managers use cost behavior to determine Number of units or services that must be sold to generate targeted amount of profit How changes in planned operating, investing, and financing activities will affect operating income 5 Planning (contd) Manufacturing companies Decide how to adjust output to meet changing sales demand Service Organizations Determine the optimal mix of services offered Decide whether to charge by the service provided or a flat monthly fee 6 Executing Managers determine how decisions about current operating, investing, and financing activities affect operating income Must understand and anticipate cost behavior Manufacturing companies Understand the changes that will result in income from a decision to buy new, more productive manufacturing equipment 7 Reviewing and Reporting Variable costing income statements Used to analyze how changes in cost and sales affect the profitability of Product lines Sales territories Customers Departments Other segments 8 Reviewing and Reporting (contd) Other reports based on cost behavior Used to decide whether to Eliminate a product line Accept a special order Outsource services 9 The Behavior of Costs Objective 2 Identify variable, fixed, and mixed costs , and separate mixed costs into their variable and fixed components 10 The Behavior of Costs Cost behavior can be observed As it relates to products and services In selling, administrative, and general activities If managers can predict how costs will behave, then costs become manageable 11 The Behavior of Costs (contd) Variable costs Vary with volume or operating activity Fixed costs Remain fixed as volume changes Mixed costs Exhibit characteristics of both variable and fixed costs 12 Variable Costs are total costs that change in direct proportion to changes in productive output or any other measure of volume 13 Variable Costs (contd) Number of Vehicles Produced Total Cost of Tires Cost of Tires per Vehicle 1 $ 192 $192 2 384 192 3 576 192 4 768 192 5 960 192 10 1,920 192 Variable cost Total cost of tires is a variable cost because it changes in direct proportion to the number of vehicles produced On a per unit basis, a variable cost remains constant 14 Variable Costs (contd) Number of Vehicles Produced Total Cost of Tires Cost of Tires per Vehicle 1 $ 192 $192 2 384 192...
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Chapter_23_For_Class - 1 Chapter 23 Cost Behavior Analysis...

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